Chapter 13 True or False Quiz

. The economic theory of regulation holds that regulation is a response by government to cases in which markets cannot efficiently allocate resources.

. Licenses and patents are examples of regulations that act as barriers to entry and thereby limit competition.

. The public interest theory of regulation holds that government regulation is intended to correct problems due to monopoly power and externalities.

. Externalities refer to the side effects of production or consumption that cause private and social costs to differ.

. If the production of a good gives rise to external diseconomies, then less of the good is being produced than is socially optimal.

. If the consumption of a good gives rise to external economies, then less of the good is being consumed than is socially optimal.

. According to the public interest theory of regulation, the presence of external effects justifies government intervention.

. Government can correct for external diseconomies of production by subsidizing production.

. Government can correct for external diseconomies of consumption by taxing consumption.

. Government regulation of an activity that produces an externality can be expected to yield a socially optimal result only if the private and social benefits and costs of the activity can be accurately determined.

. Natural monopolies exist because of government regulation.

. A firm with an average total cost curve that has a negative slope at the level of output required to supply the entire market is a natural monopoly.

. Regulation that guarantees a normal rate of return on investment gives public utilities a strong incentive to keep costs down.

. If regulators set rates too high, then public utilities will tend to underinvest in fixed assets.

. Political pressure on appointees to public utility regulatory commissions tend to result in rate changes that are larger than necessary to obtain the socially optimal results.

. The two basic statutes of antitrust legislation are the Sherman and Clayton Acts.

. The two basic statutes of antitrust legislation prohibit monopolization, restraints of trade, and unfair competition.

. The first federal antitrust law enacted was the Clayton Act.

. A trust is an organizational structure that allows firms in an oligopolistic industry to operate as a cartel.

. A tying contract requires that sellers charge a price that is tied to the quantity of output produced.

. Interlocking directorates refers to a situation in which the same individual is on the board of directors of two or more competing corporations.

. Most antitrust suits filed in the United States are initiated by either the Department of Justice or the Federal Trade Commission (FTC).

. Price collusion among firms is clearly and unequivocally prohibited by antitrust laws.

. The Justice Department will generally challenge a horizontal merger if the postmerger Herfindahl index is less than 1,000.

. Conscious parallelism refers to the adoption of similar policies by oligopolists as a response to their recognized interdependence.

. Predatory pricing refers to the case in which a firm produces a level of output where marginal cost is equal to marginal revenue and charges a price such that demand exceeds supply.

. The purpose of deregulation is to increase competition and efficiency.

. An import tariff is a direct restriction on the quantity of a particular good that can be imported during a given time period.

. An import tariff and an import quota both have the effect of protecting domestic producers from foreign competition.

. Voluntary export restraints have the same effects as import tariffs, except that the positive revenue effects are realized by the exporting country rather than the importing country.

. Taxes on consumption, such as those used in European countries, encourage saving and investment.

. The U.S. taxes labor income and capital income, which discourages work and investment.

. Taxes and subsidies have no effect on business decisions.

. Taxes and subsidies have an adverse effect on economic efficiency.

. Businesses can reduce their tax liabilities by shifting production from low tax countries to high tax countries.

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